LSI Revenue Misses, EPS Tops - Analyst Blog

California-based semiconductor company LSI Corp. (LSI) reported revenues of $629 million in the third quarter of 2010, up 8.8% year over year but down 1.6% sequentially and toward the low end of management's guidance of $625 – $655 million. The results missed the Zacks Consensus Estimate of $641 million.

LSI Corp. reports revenues in two segments – Semiconductors and Storage Systems.

Semiconductor revenues for the second quarter were $390 million, down 6% sequentially but up 5% year over year. Within the semiconductor segment, storage semiconductor revenues (which include hard disk drive silicon, SAS standard components and storage area network ICs) accounted for 38% of total revenues and were down 11% sequentially to $242 million.

Revenues in the quarter were negatively impacted by declines in shipments of hard disk drive systems-on-a-chip (SoCs) due to softness in the hard disk drive end-market resulting in inventory burn at most customers and inventory adjustments by customers in the fiber channel storage area network (SAN) and SAS (a storage product) business. LSI Corp. had earlier stated that business was stronger than usual in the first quarter which led to inventory adjustment from several customers in the second and third quarters.

Networking revenue came in at $119 million, down 2% sequentially and accounted for 19% of total revenues in the quarter. The growth in the company's networking business was offset by declines in legacy products. Revenues for the IP business were up in the first quarter to $29 million, 26% sequentially albeit off a small base.

Storage systems business (includes both external storage systems and server RAID adapters and software) generated revenues of $239 million, up 7% sequentially and up 16% year over year. This segment accounted for 38% of total revenues in the quarter.

Margins

Gross margin (excluding special items) was 49.3%, up from 48.4% in the previous quarter and up from management's guidance of 46.5% – 48.5%. The sequential increase in gross margin was driven by improvement in the semiconductor product mix, which included sequentially higher IP revenues.

Gross margin from the semiconductor segment increased 120 basis points sequentially to 55.3%. However, gross margin from the storage system declined 180 basis points sequentially to 39.5%. Operating margin improved 90 basis points on a sequential basis and 400 basis points year over year to reach 13.5%. 

The special items for the quarter included $40 million in amortization of acquisition-related items and $17 million of stock-based compensation expense and $5 million of net restructuring cost and other items.

Net income plunged 55% year over year to $23.4 million or $0.04 per share but was up from $7 million or $0.01 per share reported in the second quarter. Excluding one-time items, but including stock-based compensation expense, net income came in at 10 cents per share, beating the Zacks Consensus Estimate of 8 cents. The EPS beat can be attributed to lower number of shares outstanding along with good operational execution.

During the quarter, the company generated $82 million of cash from operating activities and used $11 million in capital expenditures. LSI Corp. used $137 million of cash for share repurchases in the third quarter.

The company has repurchased 46 million shares for $218 million in the first nine months of 2010, of the $250 million authorized by the Board for share repurchases. LSI Corp. indicated that the company will continue to buy back shares as a good use of cash and a way to return value to shareholders.

LSI Corp. ended the quarter with cash and investments of $600.8 million, down from $669.8 million at the end of the previous quarter due to repayment of debt. The company also repaid all of its debt earlier in the year and currently has no debt on its balance sheet.

Guidance

LSI Corp. projects revenues between $635 million and $655 million in the fourth quarter of 2010, up from $629 million reported in the second quarter but below the Zacks Consensus Estimate of $680 million. Revenues from networking and storage semiconductors businesses are expected to be flat to slightly down on a sequential basis. Nevertheless, revenues from storage systems are expected to be sequentially up.

Gross margin is projected between 47% and 49%. LSI Corp. expects to report second quarter EPS in a range of a loss of one cent to a profit of 8 cents. EPS excluding special items is forecasted at 10 cents – 16 cents.

LSI Corp. is currently focusing on fewer and larger end-markets. It aims to focus on established and growing applications and narrow its focus to market-leading customers.

The end-demand environment continues to be uncertain but management remains confident that new product cycles will contribute to revenues in 2011. In hard disk drives, LSI Corp. has begun ramping enterprise SoCs at Seagate and will expand to additional enterprise platforms as it moves through 2011.

The company expects to gain share in client platforms at Seagate in the second half of 2011. LSI Corp. also expects to ramp generation servers at International Business Machines (IBM), Dell Inc. (DELL) and Cisco (CSCO).

Shares of LSI Corp. were up 2.53% in after-hours trading to close at $4.86. In regular trading, the stock was up 1.28% to close at $4.74.

 
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